On May 27, North Macedonia became the latest country from the Central and Southeast Europe region to tap international markets with a €700mn Eurobond. Governments across the region have turned to the international capital markets to raise money to meet the gap between increased costs and lower revenues as a result of the coronavirus (COVID-19) pandemic. And these exotic issues have been met with enthusiasm by international investors on the hunt once again for yield in world that has returned to zero-interest rates as a result of the current crisis.
North Macedonia got its bond away to an enthusiastic reception. The finance ministry said that the issue was five-times over subscribed. North Macedonia has offered a total of seven Eurobonds since its debut in 2005, and the latest was sold at an annual interest rate of 3.657% -- the lowest rate to date except for its previous issue in 2018.
The coronacrisis in the country is far from over. Skopje is still reporting dozens of new cases every day — which the authorities say is because people aren’t following distancing rules — and the government recently revised the 2020 budget, expanding the deficit to 6.8% of GDP. The ministry said that with the issuance of the new Eurobond, the €176mn loan from the International Monetary Fund (IMF) and the planned loans from the World Bank of €140mn and the EU of €160mn, the needs this year will be met.
Serbia willing to go it alone
Serbia has been another one of the EU candidate countries from the Western Balkans to tap the market as it has an increasingly compelling investment case to sell: Serbia raised €2bn with a seven-year Eurobond issue earlier in May.
The funds will be used to finance Belgrade’s stimulus measures as the government decided against borrowing from the International Monetary Fund (IMF) or the EU. Indeed, the finance ministry highlighted the country’s readiness to go it alone, saying in a May 11 statement that “Serbia is the sole European country that went out on international markets during the time of the COVID-19 pandemic without the help of the European Central Bank in the sale of the bond.”
The securities carry a 3.125% coupon. More than 300 investors bid for the bonds, placing offers for €7bn. Thanks to the high investor interest, Serbia was able to lower the cost of borrowing by 0.5pp.
“Investors have shown that Serbia reacted well in the time of the coronavirus pandemic and took the respective economic measures that would help the economy to overcome this period and resume the economic growth,” the finance ministry said in the statement.
Raiffeisen analysts said in a note that the high volume of bids "demonstrated healthy demand for Serbia risk in crisis time".
"Since the Covid-19 outbreak Serbia sovereign spread (the note due 2029) went up from 178bp at end-February to 359bp as of yesterday. In this regard Serbia risk re-pricing stood closer to Romania, for which sovereign spread widened by similar 180bp, while Croatia suffered only a 120bp increase," the note said.
A few days after the issue, central bank governor Jorgovanka Tabakovic said Serbia plans to refinance the Eurobond when conditions become more favourable. “Once the conditions in the international market are right, Serbia will consider the options for replacing the funds raised through Eurobond issue at even more favourable terms, just as it did last year,” Tabakovic said.
Raiffeisen Research noted that Tabakovic’s statement confirmed its view that CEE governments will not hesitate to issue Eurobonds right now, as their plan could be to refinance this more expensive debt under better market conditions in the next two years.
Romania issues bonds into growth
A little further to the north Romania’s Ministry of Finance lead issues in Southeast Europe with a dual tranche €3.3bn Eurobonds with maturities of five and 10 years on May 19.
The target size of the two bonds was initially set at €3bn with €1bn for the five-year maturity and €2bn for the 10-year maturity. But both tranches were heavily oversubscribed and Romania decided to increase the five-year tranche to €1.3bn. In total, investors placed orders for nearly €13bn of Romanian paper: €4.4bn for the five-year maturity and €8bn for the 10-year maturity.
Bloomberg reported that the coupon for the five-year tranche was set at mid-swap plus 305bp, while that for the 10-year tranche was set at mid-swap plus 375bp.
Earlier in January, Romania paid only 180bp over mid-swap for 12-year and 285bp over mid-swap for 30-year. However, at that time only one of the three major rating agency was holding the country on the negative watch list, the pandemic was not a major threat to Europe's economy and the worst-case scenario for Romania included growth rates of around 3% (compared to 4%-6% contraction now).
In a recent report UniCredit estimated that the gross financing need of Romania is €21bn in 2020, including a budget deficit of €12.7bn and the rest being debt rolled over.
More could follow. The Croatian government is likely to return to international financial markets this summer, Raiffeisen said in a research note on May 5.
A $1.25bn Eurobond is due to mature in July, which, Raiffeisen analysts wrote, “suggests additional issuances, this time very likely on the international capital markets”.
Croatia has already tapped the local bond market, issuing €1.445bn of new euro-linked bonds with maturity in 2027 on May 4.
The government also raised the state debt-borrowing limit for the year by HRK24bn (€3.2bn) as it seeks to help the economy recover from the coronavirus (COVID-19) pandemic. In particular, Croatia’s large tourism sector is set to see a slump in revenues as a result of the pandemic, which makes up a big part of the country’s income.
“The government can use the additional limit to borrow on domestic and international markets. In our opinion Croatia could be looking to return to international markets in the coming months,” Raiffeisen analysts wrote.
However, they added, “Recent risk-repricing pushed the spread on Croatia Eurobond market to 258bp spread for the 2028 maturity EUR note compared to 187bp for similar duration Bulgaria. So the government may want to wait for the re-opening of the economy and global risk aversion going down before it would tap the Eurobond market.”
The Albanian government is planning to issue a Eurobond worth €650mn before the summer, which is up from €500mn planned earlier this year.
Albania needs more than €1.35bn to save the country’s economy which is expected to suffer huge losses due to the lockdown caused by the coronavirus, Finance Minister Anila Denaj said on April 24, as reported by local media.
Rating agency Fitch said in April that it expects that Bulgaria will issue a €2bn Eurobond in 2020 and another €1bn in 2021 to cope with the economic consequences of the lockdown. It noted, however, that these assumptions are uncertain due to the evolving economic outlook.
The Moldovan government is examining the option of issuing Eurobonds this year to finance infrastructure projects, a government statement said on May 13.
“The objective of issuing the Eurobond is to modernise and industrialise the country. We need resources to boost the process of raising the standard of living and to create stable and well-paid jobs in the country's districts,” said Chicu.
Moldova’s issue comes in the midst of a funding scandal where the
Constitutional Court rejected, for reasons not yet explained, the law on the ratification of a €200mn loan from Russia, part of a bigger €500mn financing agreement aimed at investments in infrastructure.
At issue is clause 7.2 in the loan agreement with Moscow that would allow “other debt” to be wrapped into the current agreement. Opposition politicians say the clause is a trap that opens the door for Moscow to saddle the government with more than $5.8bn of disputed debt for gas sales to the breakaway region of Transnistria that is no longer under Chisinau’s control.
The idea of issuing Eurobonds was for the first time voiced by the newly established government of Prime Minister Ion Chicu at the end of last year. At that time it was announced that the government is considering "the solution of tapping the international financial market with a seven-year Eurobond as of 2021, in a total amount of $500mn”. Chisinau is understood to be looking particularly at the recent issues by Armenia and Serbia.
Chisinau’s last Eurobond issue was back in 1997. In 2002 it restructured the $40mn bond over another seven years.
However, last April, Trans-Oil Group, a major trader and processor of oilseeds in Moldova and the main operator of the country's sole port Giurgulesti, issued a $300mn bond but it had to accept 12% yield. The bond was issued by Cyprus registered Aragvi Holding International, the vehicle that owns the holding.
The series of bond issues from Southeast Europe in May and upcoming in June follow issues by their northern neighbours in Central Europe and the Baltic states from April onwards, also in response to the coronacrisis.
The largest single issue from the region was the €4bn of new syndicated 5- and 12-year bonds from Slovakia on May 8 in response to a sharp rise in funding needs. Hungary issued a six-year €1bn Eurobond and a 12-year €1bn Eurobond on April 23. Two of the Baltic states have already issued Eurobonds in April, with Lithuania issuing €2bn and Latvia €1bn. Estonia has now announced it will follow suit, with the government outlining plans on May 26 to place at least €1bn worth of 10-year benchmark bonds to address the deficit created by increased spending to tackle the coronavirus pandemic.